Research

Abstract: The Tax Cuts and Jobs Act (TCJA) of 2017 reduced a homeowner's tax deduction benefits from deducting mortgage interest and property taxes. Since a seller can capitalize the tax deduction benefits related to housing into a housing price, the TCJA affects the seller's listing price decision and market outcomes. To investigate a seller's listing price choice and market outcomes in response to changes in various types of tax provisions related to housing, I develop a structural model in which the seller chooses the listing price to maximize his payoff, the sales price net of his waiting cost. Using the estimated model, I find that the TCJA causes the seller to choose a listing price that is approximately 7.38% lower, which leads to about a 7.30% reduction in the sales price and about one week reduction in the time on the market. The TCJA mostly impacts high income households and high property tax payers. In addition, based on the bills introduced in the 118th Congress, I evaluate the effect of increasing the state and local tax (SALT) cap after the TCJA is implemented in three different SALT limits. As the SALT cap increases, both the listing price and market outcomes are inclined to return to levels closer to those predicted results of the pre-TCJA tax regime. Moreover, those most affected by the TCJA, specifically high income households and high property tax payers, increase their listing prices the most, consequently leading to the most increases in their sales prices and time on the market compared to others. Finally, I quantify the impact of eliminating the mortgage interest deduction on the seller's listing price and market outcomes, assuming that the TCJA has expired. Based on the model projection, the seller's listing price decreases by approximately 16.43%, the sales price reduces by 16.34%, and the time on the market decreases by about two weeks on average when the mortgage interest deduction is eliminated.